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IMF oil shock scenario could add 30c a litre to Australian fuel prices and force RBA to hike further, economists warn

Washington-based fund models Middle East conflict pushing crude to US$130 a barrel, a 'clear and present danger' to global growth

By LineZotpaper
Published
Read Time2 min
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An International Monetary Fund scenario in which a worsening Middle East conflict pushes global oil prices to US$130 a barrel could lift Australian petrol prices by another 30 cents per litre and force the Reserve Bank to raise interest rates further, economists say.

The IMF's latest World Economic Outlook models the impact on global growth and inflation if the Middle East crisis persists through the end of June 2027, keeping the straits of Hormuz and Bab el-Mandeb largely closed to commercial shipping and delaying the recovery of oil supply until the end of 2027. Under that scenario, oil prices reach US$130 a barrel from the fourth quarter of 2026 to the first quarter of 2027, up from more than US$106 a barrel now.

The Washington-based institution did not publish a specific estimate for Australia from the hypothetical US$30 jump in crude prices, but it described the situation as a "clear and present danger" to a resilient global economy.

Unleaded petrol prices in Australia's major east coast cities have already pushed above $2.40 a litre in recent days, towards six-month highs, while diesel has eased but remains high at about $2.80 a litre. Using the rule of thumb that every US$10 rise in global oil prices adds 10 cents a litre at the bowser, a US$30 oil price increase could drive unleaded petrol towards $2.70, the highest since the start of the war more than seven months ago.

Economists said such a move could leave inflation more than 1 percentage point higher than expected by the end of the year, adding to households' cost-of-living pressures and dragging on growth.

Jonathan Kearns, chief economist at Challenger, said the RBA, alongside other central banks, would have to respond to higher fuel costs with higher interest rates. "The question is how much higher," he said.

The RBA delivered a fourth consecutive interest rate hike last month. Minutes from that meeting, released on Tuesday, showed board members discussed how the Middle East conflict had escalated and oil prices were substantially above the level assumed in the August forecasts. "More broadly, members noted that global cost pressures appeared to be building," the minutes said.

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Analysis

Why This Matters

  • Australian motorists are already paying above $2.40 a litre for unleaded in east coast capitals, and a further 30 cent rise would push the cost of living up sharply again.
  • A sustained jump in fuel prices would feed directly into inflation, complicating the Reserve Bank's efforts to bring prices under control and raising the prospect of further interest rate hikes.
  • The scenario illustrates how a distant geopolitical conflict, specifically disruption to shipping through the straits of Hormuz and Bab el-Mandeb, can flow through to household budgets in a matter of months.

Background

The IMF's World Economic Outlook is a quarterly survey of global economic conditions and forecasts. This year's report includes stress-test-style scenarios, and the Middle East oil shock is one of the risks it highlights. Australia is a net importer of refined fuel, so domestic petrol prices track global crude prices closely, with a lag of a week or two. The RBA has also been raising interest rates in response to inflation, and has already delivered four hikes, the most recent last month.

Key Perspectives

Reserve Bank of Australia: Board members have acknowledged that oil prices are running well above the level built into their August forecasts, and that global cost pressures appear to be building. The bank is weighing whether further hikes are needed. Economists: Challenger's Jonathan Kearns argues that a rise in fuel costs would force the RBA to respond with higher rates, with the only question being the size of the increase. Other economists point to inflation running more than 1 percentage point higher than expected by year's end. Households and businesses: Higher petrol and diesel prices add to cost-of-living pressures and raise the cost of transporting goods, which can feed through to prices across the economy.

What to Watch

  • Actual movement in crude oil prices and any further escalation of the Middle East conflict, especially around the straits of Hormuz and Bab el-Mandeb.
  • Whether average petrol prices in Sydney, Melbourne and Brisbane push through $2.70 a litre as the oil price scenario is realised.
  • The RBA's next rate decision and whether board members cite oil prices as a reason for further hikes.

Sources

Zotpaper

Written by software from the reporting listed above, scored by an automated standards desk, and published without a person reading it first. If something here is wrong, tell the editor and it will be put right.

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